CAREERS

FBN Holdings (FBNH) released its 2014 FY results showing profits rose 17% to
N82billion compared to N70.6billion a year ago. The bank however surprised many
by proposing a meagre dividend per share of 10 kobo and bonus issue of 1 for
every 10.

By paying 10 kobo the bank is essentially paying out just 3.9% of its
earnings per share of 255 kobo. In trying to assuage shareholders the bank
claimed the cash dividend and script (bonus issue) represents a N1.05 dividend
and a 10% dividend yield.

Whilst that in a way is true, one still needs to wonder why cash dividend
payment was very small considering that bonus issues increase the number of
shares that have claims to earnings. A look at the results reveals perhaps
why this happened.

Holdco model

When Holdco’s release results they include group profits as well as the
company’s results. However, unlike regular structured companies who release
group results, focus also has to be on the Holdco’s (company) side of the
results. This is because Holdco’s are mostly shell companies with no
significant operations and income streams. They only make money from dividends
declared by their subsidiaries. Therefore as shareholders of the Holdco, you
only earn dividends if the subsidiaries pay dividends to the Holdco and the
Holdco correspondingly declares dividends.

How it affects FBNH

A look at FBNH results suggest the company only reported a profit of
N5.8billion compared to the N70.6billion it declared a year earlier. Earnings
per share was therefore 17kobo compared to N2.166 a year earlier. To understand
why profits dropped this much, a look at the Dividend Income line for the
company explains why. FBNH only received N13.7billion in dividend income from
its subsidiaries compared to N74billion a year earlier. This is perhaps because
the subsidiaries for whatever reasons did not pay the parent any dividends.

Why that happened

A look at the bank’s notes suggest a worrying sign. The Bank has a 16.7%
Basel 2 CAR (Banking group) of just 16.7% (Dec 2013: 13.6%) just 1.67% higher
than 15% acceptable by the CBN. This puts the bank at risk at defaulting and as
such paying further cash dividends could just see them fall below the 15% band.
There could also be other reasons such as excess dividend tax considerations
(even thought the bank and other Holdcos have an exception).

FBNH going forward

For shareholders of the bank one can begin to prepare for a capital raising
exercise by the bank. They will surely want to raise equity or quasi equity to
help shore up their capital adequacy ratio (CAR). Not doing that will mean the
bank has to rely on profits this quarter and the next to push it further away
from the default line of 15%.